Series 7 Exam Question 373: Answer and Explanation

Question: 373

Luke Landworker holds 10 XYX May 30 calls. XYX increases to $40, and he exercises the calls. Luke tells his registered rep to sell the stock immediately after purchase. If these trades are executed in a margin account, how much does Luke have to deposit?

• A. $3,000
• B. $30,000
• C. $35,000
• D. No deposit is required.

Correct Answer: D

Explanation:

D. Luke owns the calls that he's exercising. Luke exercises the options at a profit of $10 per share (less the premium) and is selling the stock immediately, so no deposit's required. It certainly wouldn't make much sense to have Luke pay $30 per share when exercising the options and then have the firm send Luke a check for $40 per share. The key here is that Luke exercised the option and sold the stock on the same day.